Netflix Takes Streaming to a New Level

Level 3 Communications (Nasdaq: LVLT) announced this morning that it has been selected to be a primary content delivery network (CDN) for Netflix's fast-growing streaming service.

Over the next two months, Level 3 will begin stocking its servers with Netflix's digital catalog, which has grown to 20,000 titles. Level 3's streaming to Netflix subscribers will kick in come January.

Shares of Level 3 traded as much as 17% higher on the news. Rivals Akamai (Nasdaq: AKAM) and Limelight Networks (Nasdaq: LLNW) are trading lower.

It's important to point out that Level 3 will be a primary network and not the primary network. Akamai and Limelight will continue to be Netflix partners, making the real winner here -- quite frankly -- Netflix itself.

It was back in March when it was announced that Akamai would be theprimary content delivery network. However, StreamingMedia.com's Dan Rayburn also reported -- before the deal was even made public -- that Akamai was receiving preferred status because it would be offering ridiculously low prices through at least the first few months of the deal.

So here we are, several months later, and folks are surprised that Netflix has moved on to the next CDN that's likely coming in with loss-leader pricing to nab a sizable chunk of the Netflix account?

I should also point out that it was Rayburn who correctly reported earlier this week that Akamai was about to lose its status as the only primary provider for Netflix. In short, the guy knows his stuff.

In the end, I can't be the only one concerned about the cutthroat nature of the CDN industry. Akamai's stock has roughly doubled over the past year as the undisputed leader of this growing niche, but margins will continue to be pressured as long as there's always a hungry upstart out there with a server farm and the ability to withstand ridiculously low bandwidth rates.

I realize the market's quick to tap Level 3 as a winner today -- and Akamai and Limelight as losers -- but the only real winners here are Netflix and its subscribers.

What do you think of Netflix's streaming service? Share your thoughts in the comment box below.

Longtime Fool contributor Rick Munarriz has been a Netflix shareholder -- and subscriber -- since 2002. Rick is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has adisclosure policy.

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Isn't another possibility is that with Netflix's cashflows down to a measly $7.8M in the most recent quarter, they have decided to choose price over quality?

I mean -- given that LVLT is working to expand its infrastructure ahead of NFLX copying the catalog to their storage in Q1 -- it's not like NFLX has been able to complete the necessary tests to make this a decision based on LVLT performance.

The article states that LVLT is copying the catalog to storage now so Netflix users have availability in January. I think LVLT has plenty of capacity. I would be more concerned about their financial condition. They are really not in a great position to acquire low/no margin business. Maybe they are the true low cost provider.

LVLT is the true low cost provider because no one else is making a profit from reselling the data services they're selling netflix. Anyone else Netflix contracted with would sub-contract with LVLTs or LVLTs subcontractors/peers, like comcast. Netflix wins because instead of going to Sam's club, they're going strait to Sam's club's supplier, who can offer them a better deal, and still make money.

Whatever upgrades LVLT makes will be used by somebody; even if Netflix pulls out, they will just end up paying somebody who pays somebody who will end up paying LVLT anyway. Netflix generating high volumes of internet traffic means more traffic on the internet backbone, and more money for LVLT (and the need for upgrades).